Analysis of current economic conditions and policy

More on Japan

I wanted to add a few quick additional comments to Ilan Noy’s reflections on the possible economic implications of the tragedy in Japan.

In assessing the economic consequences, it’s useful to draw a distinction between narrow-swath and wide-swath disasters. In a narrow-swath event like 9/11, the destruction was horrific but was narrowly focused, leaving intact the response infrastructure and allowing immediate access to the impacted areas. In a wide-swath event like Katrina, the nature of the disruption made it very difficult logistically for any emergency or relief operations to function, and returning to some sort of normalcy was a very difficult process.

In the current situation, Japan’s damaged infrastructure includes electricity generation and transportation. Fear of radiation could hamper not just immediate relief efforts, but could profoundly influence all kinds of spending patterns, which I could easily see exerting big effects on demand in addition to the obvious considerations on the supply side. To paraphrase Franklin Roosevelt, the fear itself could cause more economic damage than the physical events themselves, and the physical damage was of course itself quite awesome and frightening.

And here are some quick links to thoughts of others:

Michael Schuman notes the importance of Japan for supplies of electrical components, but does not expect a dramatic economic effect on the rest of the world.

Arnold Kling notes that his theories of the importance of specialization have quite different implications for the macroeconomic effects of a disaster like this one than do more standard aggregate supply-demand models.

Phil Izzo, as usual, has a very useful collection of comments from other observers.

Paul Krugman is skeptical of direct consequences for financial markets.

Tim Duy sees limited overall economic impact, wondering if economists have a “tendency to initially overestimate the potential impact of such events as they believe the economic impacts must somehow reflect the human impact.”

On that last point, I’ve been talking here about the economic impact, that being the primary focus of Econbrowser. But let me emphasize, as I’m sure Tim would as well, that even if the economic implications of these events for the rest of the world turn out to be relatively minor, no one can doubt that we have been watching a the unfolding of a human tragedy of staggering dimensions.

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15 thoughts on “More on Japan”

I see some signs of over-reaction:
1. Market bears taking signs of delays in components shipped from Japan without examining where in Japan those components come from and how many factories are actually affected.
2. Debt bears constructing scenarios in which Japan no longer buys US bonds and that causes a terrible financial mess that destroys the dollar. I’m not exactly sure how they draw all those dots together but they do in their minds.
3. Anxiety over radiation.
As I noted, I think, in some other comment, we used to test nuclear weapons in the air in Nevada where the mushroom clouds were visible from Las Vegas. I’m talking huge quantities: 3 years of 36,000 kilotons and 1 of those being 48,000, mostly in the air in the US, compared to Hiroshima’s yield of 13-18 kilotons. The Soviets did much more, again mostly in the air.
I find it weird that people worry so much about extremely unlikely events. I know research says we should expect this reaction but it’s odd to see how a wave of worry sweeps people away from reason. These reactors took 1 of the worst earthquakes ever recorded plus a tsunami now estimated to be as large as the one that devastated parts of Indonesia. In other words, a true worst case scenario and yet we’re ready to halt nuclear construction in areas which have never seen much in the way of earth movement and no tsunamis even possible. Weird to see, especially since we are reluctant to halt deepwater oil drilling despite the Gulf, despite that being human error not giant acts of God. Weird.

I wonder if Duy has actually looked into the history of economists predictions about disaster. Reuters, in reporting some initial estimates of the cost of the quake and tsunami to Japan, noted that early estimates tend to be too low, not too high. Reuters was writing about direct costs, not economic losses, so it is possible for both Duy and Reuters to be right. Still, I wonder if Duy has evidence that economists over-estimate economic impacts.

I found this article in The Register quite good, Fukushima is a triumph for nuke power: Build more reactors now!
Quake + tsunami = 1 minor radiation dose so far.
And Lubos Motl provides some basics on radiation and crunches the numbers on the effects we could expect on the population should there be a persistent increase in radiation in populated areas:
“If you spend twelve hours by playing in the vicinity of the worst reactor of the Fukushima power plant, you will probably die. And if you die, who will continue to fight against the meltdown threats? Between the reactor buildings 2 and 3, the equivalent dose is 0.03 Sievert per hour. That will give you 150 hours of life over there – unless you are protected in some way.
Of course, it’s much more important what the radiation levels will be in the nearby large towns – and I don’t even want to use the word Tokyo in this paragraph. But be sure that if the radiation level in Tokyo or another city managed to jump to something like a millisievert per hour, or even per day (and it would be sustained for a day), that would mean that 1/5,000 of the population of the city would ultimately die as a consequence of the exposure during the hour (except for those who would manage to die earlier because of another reason) unless they were successfully kept indoors all the time.
…
Just to end up with some relatively good news: a millisievert per hour is (so far?) insanely far in Tokyo. They measured 0.8 microsieverts per hour. I defined one death per person to be 5 Sv, so 0.8 microsieverts per hour means 0.16 ppm (parts per million) death per person and per hour. Multiply it by 37 million people in the Tokyo metro area and you get 6 deaths in the city per hour (or 150 deaths per day or so, if the radiation remains elevated). That’s nonzero but won’t be measurable statistically and will remain hugely smaller than the casualties of other lethal threats.”

Will this cause a return to zombie banks in Japan?
John Hempton made a case that Japanese banks have very low profitability due to low credit spreads. As such they don’t have a safety margin built up before the crisis.http://brontecapital.blogspot.com/2011/03/banking-and-supercatastrophe.html
In the 90s, the Japanese government prevented the collapse of its banking system by tolerating zombie banks. Banks allowed their borrowers to keep rolling their loans forward. Therefore bank avoided recognizing loan losses a long as possible.
Given the current crisis, it seems very difficult to not recognize the loan losses to all the properties that were destroyed.

I think the nuclear option is one that is mandatory to include in any economic scenario, as it slowly but surely progresses to catastrophe. Bar some unknown supersecret supermaterial, there is nothing that can be done to stop escalation of damage and radiation leaks.
The question is only how far escalation will bring Japan into post-nuclear accident contaminated country, how big Area, and will Tokyo be exposed to increased levels of radiation.

aaron, these are temporary variations of radiation. If You follow the developments in the reactors step by step, they get from bad to worse. There are more and more places with heating exposed rods, not enough cooling in 4 reactors. There is also no workable idea how to cool them, so far. All that has been done so far has failed in the end, and the structures has become more and more damaged.
So I would not be reading to much in short term variations of radiation following leaks after explosions. What I would look at is the developments in reactors- are they succeeding in cooling them down and stopping further structural damage, or not. So far, they are not, nor there are any sound ideas what to do. Personnel and choppers can not operate due to radiation (personnel can from time to time in short bursts, but the critical places inside are already unaccessible. ) Now they will try water cannons.http://www.zerohedge.com/article/us-energy-chief-says-partial-meltdown-has-occurred-fukushima-urges-all-us-citizens-within-80
Changed safety levels for nuclear workers in Japan:
“In order to deal with a new baseline level of radiation across Fukushima (which Japan still refuses to discloses to the world because it is “Under Survey”), the Japanese ministry of health labor has decided to take the unilateral act of scrapping years of safety data, and more than doubled the maximum allowable exposure for nuclear workers from 100 millisieverts to 250 millisieverts”
i do not think the government of Japan is telling all truth-why should it? It will cause panic worldwide.

The Izzo piece included this:
“…The cost of rebuilding collides with low levels of insurance coverage…”–Ron Napier, SBC Global
Does anyone here know what he’s referring to? Do Japanese households/businesses have generally low levels of coverage? Or maybe he means, a lot of the losses will in non-insured government assets?

In the midst of this horrific tragedy, it’s been baffling to observe economic ignoranti masking as media commentators declare that the ‘positive side’ to the devastation will be increased economic activity by way of recovery spending. They’ve discovered an alchemist’s route to economic growth: destroy physical and human capital, add in tons of human suffering, and watch the economy soar.

Bob, need to know what you’re talking about.. I doubt the Japanese were under-insured. What he’s probably talking about is that in a widespread catastrophe, the resource to rebuild are diminished and the demand spikes up at the same time. This causes replacement cost to exceed insures value.

Japanese are heavily under insured as earthquake protection is bought separately from general damage insurance and most choose not to pay the extra premium. In Kobe Earthquake, if I remember correctly, from 100 billion of costs only 3 billion were covered by insurance companies. Rest went to government.
Yes, the Krugman style hurrahs for the devastation that will improve GDP and INFLATION, are really sickening in this situation.
I wonder how long still before he is proved wrong. Not much. But I know then the blame will be laid with governments who DID NOT spend and ease enough. Completely irrational behavior should be the governments role, for some reason I do not understand, while people and companies are expected to continue act rationally in these circumstances. Why should they?